Some home improvements are tax deductible, while many are not. Home improvements that are not tax deductible may add to the "basis" of your house and decrease the amount of capital gains taxes you will have to pay upon selling your house. It is highly recommended you seek help from a qualified tax professional if you have any questions about deducting the cost of home improvements.
Definition of a Tax Deduction and Credit
Before we examine deductible home improvements, it is important to know the definition of a deduction. A deduction reduces the amount of your income that will then be taxed, while a tax credit reduces the amount of tax that you pay. If you have more tax credits than taxes you owe, you may receive money back. With a deduction, if you can deduct more than you make, you will not receive any money back.
Home Repairs and Home Improvements: Generally Non-Deductible
Unfortunately, basic home repairs (fixing a leaky pipe, patching a roof) are non-deductible. Once the repair becomes large enough to be considered a home improvement -- in the leaky pipe example, if instead of replacing a leaky pipe, you repaired the whole plumbing system and installed new piping -- you can add the cost of the improvement to your basis. Although it is not a deduction, it will reduce the taxes you owe upon selling your house. Make sure to keep all receipts from such repairs, because without those, you will not have evidence of your increased basis.
Like basic home repairs, most home improvements are not tax deductible. There are, however, a few categories of home improvements that you can get tax deductions or credits for: interest payments, medical necessity and energy efficiency.
Deductible Home Improvements--Interest Payments
If you took out a loan to pay for the home improvement, you can deduct the cost of interest you paid on the loan, but only if the total of your mortgages and loans for home improvement are less than $500,000 ($1 million if filing a joint return).
Deductible Home Improvements--Medically Necessary Improvements
Medically necessary home improvements can be deducted as a medical expense. These include ramps and handicap-accessible doorways and bathrooms and can even include such things as a medically necessary pool. Basically, these improvements must be ordered by a doctor or be medically necessary -- anything above and beyond necessity will not be deductible, though the amount up to a necessary home improvement will be. That is, if a doctor requires you to swim in a pool every day and there are no pools nearby, but you need to install only a small pool, you can only deduct the costs of what is minimally necessary -- anything above that gets added onto the basis (the initial cost) of your house.
Energy Efficiency Tax Credits
A tax credit is available for home improvements that increase the energy efficiency of your house. An example of such a project is installing solar panels. However, many provisions of this credit are time-sensitive and may expire soon, so make sure to seek help from a tax professional before attempting to obtain the tax credit.
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